The most common reverse exchange structure involves the exchange accomodation titleholder (EAT) taking title to or “parking” the property which the taxpayer intends to use as a replacement property in a 1031 exchange. This type of exchange may be referred to as parking the replacement property or as an exchange last reverse 1031 exchange.

The IRS provides a safe harbor for a reverse 1031 exchange provided that the certain conditions are met. The taxpayer must enter into a "Qualified Exchange Accommodation Agreement" (QEAA) with an EAT that states that the taxpayer intends to meet the requirements of Section 1031 and Revenue Procedure 2000-37.

What are the requirements of a reverse exchange?

Similar to a forward 1031 exchange, there are certain timing and documentation requirements for the reverse exchange to be valid. These include:

The QEAA needs to be entered into within five days of when the EAT purchases the replacement property.

Within 45 days of the purchase of the parked property, the taxpayer must complete an identification form indicating the relinquished property that will be sold in conjunction with the exchange.

The parked property must be transferred to the taxpayer on or before the 180th day from the date of acquisition by the EAT. This generally occurs immediately after the taxpayer’s relinquished property is sold. The parked property becomes the taxpayer’s 1031 replacement property.

In reverse exchanges, the IRS allows for the taxpayer to:

advance funds to the EAT to acquire the parked property

guarantee the debt used to acquire the parked property

manage the replacement property during the parking period

supervise any construction or improvements on the parked property

There are different ways to structure and administer reverse exchanges within the safe harbor, including reverse exchanges where the relinquished property, rather than the replacement property, is the property that is held by the EAT (an exchange first transaction).

Non-safe harbor reverse exchanges

For reverse exchanges that take longer than 180 days, an exchange may still be successful and “long term” parking arrangements may be utilized. For additional information about non-safe harbor parking exchanges please refer to: